Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. With this loan, the amount of interest expense that Davis reports on its income statement will be the same for each year of the loan.

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The loan described uses an amortizing method where payments are made in equal annual installments that cover both interest and principal. As the principal balance decreases with each payment, the portion of each payment that goes towards interest decreases over time, while the portion that goes towards the principal increases. Therefore, the interest expense reported on the income statement will decrease each year.

Davis Corporation Borrowed $50,000 on January 1, Year 1